Do you own a business – either incorporated or unincorporated – and have a spouse or one or more adult children with an income lower than your own?
If so, you may be able to shift your income to these other family members, effectively moving the income from a high tax rate to a low tax rate and decreasing the overall tax burden on your family. This is called income splitting.
Corporations have the ability to pay dividends, which are distributions of after-tax corporate earnings, to adult shareholders regardless of the services they provide to the business. Unincorporated businesses are restricted in this regard as family members can only be paid by way of salary, which must be based on the services they provide to the business. Because of this, corporations have the advantage of being able to split business earnings among family members to lower the overall tax burden on the family. There are special tax rules in place to discourage dividends being paid to children under 18 years of age, though.
An example of this is as follows. For an individual with an unincorporated business earning $100,000 per year and a spouse with no income, the total tax burden on the family would be approximately $22,000. If the business was instead a corporation and dividends were split evenly between the two spouses, the combined corporate tax of the business and the personal tax for you and your spouse would result in a tax burden on the family of only $18,000 – an annual tax savings of $4,000.
To expand on this example, for an individual with an unincorporated business earning $200,000 per year, a spouse with no income, and one adult child with no income, the total tax burden on the family would be approximately $58,000. If the business was instead a corporation and dividends were split evenly between the two spouses and the one adult child, the combined corporate tax of the business and the personal taxes of the three individuals would result in a tax burden on the family of $42,000 – an annual tax savings of $16,000. With the recent increase in top tax rates in Alberta, the savings can be even greater if your income is over $200,000.
If you have an unincorporated business and wish to take advantage of income splitting, there is both legal and accounting work required to incorporate your business. If you fully own a corporation and wish to take advantage of income splitting, there may also be both legal and accounting work required to issue shares to your spouse and adult children. KWB can help you in either situation. Call us today at 780-466-6204 or email firstname.lastname@example.org to set up an appointment to discuss income splitting and your unique business situation.
Other Posts by Richard
Are you interested in what some of the current economic conditions are in Europe and the U.S.? For a quick and easy to understand snapshot, in a half page summary format, read on.
KWB Client Focus Group Meeting
On June 7th, KWB invited six of its clients to participate in a client focus group with the goal of discovering opportunities to better serve its customers. We learned a lot, and we want to share with you not only what we learned but also what we plan to do with it – to ensure that KWB is your accounting firm of choice today and in the future. For some of the details of what we learned and what we plan to do about it, read on.
KWB Seminar Topics
Vote on Future KWB Seminars
2.Health & wellness
3.Hiring foreign workers
4.Client think tank (Improving customer experience)
5.Customer service ideas
6.Acting as an executor or agent
8.Finance for children, teens
9.Navigating post secondary
11.How to use an on-line portal
Starting a new business?
There are a number of things that you will need to do including:
1) Incorporating a company. But before you do, you should talk to us about the types of shares and number of shares that should be issued to each person that you are thinking about involving in your business. And who should
Retirement Planning Alternatives
We have all been told to plan for our retirement. Yet, have you ever wondered WHY?
Perhaps you have a plan, most people do, but is it the RIGHT plan? In the following example, it is clear how ADVANCED planning can make a huge difference for you and your loved ones.
In the table
The "Family Tax Cut" credit
Prime Minister Stephen Harper and Finance Minister Joe Oliver recently announced a “Family Tax Cut” credit which allows certain Canadian families to reduce their overall federal income tax. This relief will be available starting in 2014.
The new measure would allow a higher income spouse to shift a portion of their income to a lower
Child Related Benefits, Expenses and Deductions
There’s great news for 2015 for Canadians with children. Stephen Harper has announced a “child care benefit boost” – which includes an increase to, or return of, the monthly Universal Child Care Benefit cheques and an increase to the amount taxpayers can deduct for child care expenses and the child fitness credit.
Change in use of property from capital to inventory or vice versa.
There are no immediate repercussions for the change in business use of property from capital to inventory. The differences arise upon sale of the real estate.
There is no provision in the Income Tax Act which describes the circumstances in which gains from the sale of real estate are to be determined as being either
Corporate expenses - What can you deduct?
Often deductible business expenses are overlooked or missed as business owners are unsure whether they are deductible.
A business expense is any cost incurred by the company to generate income. These expenses must be supported by physical documents such as invoices, purchase contracts, sales receipt, etc. If cash is used to purchase items, it is
Alberta Corporate Tax Rate Changes
In addition to personal income tax increases, the Alberta NDP government has also increased general corporate tax rates.
However, businesses that earn $500,000 or less of active business income will not be affected by the tax increases due to an offsetting increase to the Alberta small business deduction rate. Businesses that have more than
Deciding when it’s time to start taking your CPP retirement benefits
You can start receiving CPP pension benefits when you reach age 65 (the month after your 65th birthday) which will entitle you to a full CPP benefit depending on how much and how long you have contributed to the CPP.
However, you have the following choices:
Take a reduced CPP retirement pension as early as
While the tax debts of a corporation belong to the corporation and the tax debts of an individual belong to that individual, there are some exceptions to the rules. Directors may be held personally liable for certain tax liabilities of the corporations they serve.
When a corporation faces insolvency, remittances to the government may fall
HOME ACCESSIBILITY TAX CREDIT (HATC)
The 2015 federal budget announced the introduction of a new Home Accessibility Tax Credit (HATC), beginning in 2016.
The HATC is a non-refundable tax credit for qualifying expenses incurred for work performed or goods acquired in respect of a qualifying renovation of an eligible dwelling of a qualifying individual. A qualifying individual and eligible individuals
CRA Letter Campaign
Every year CRA conducts reviews and audits to sample and educate tax payers on tax compliance, and 2016 will be no different.
CRA estimates that approximately 30,000 letters will be sent out across Canada this year. These letters will give you information about certain claims you have made on one or more of your
Top 7 Overlooked Tax Deductions
Are you paying too much in taxes? Are you getting all the tax deductions available for your business?
An effective way to minimize your company’s tax expense, in addition to good planning, is to ensure the company is claiming all of the expenses legitimately allowed under the tax act. Take a look and see if any